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Cryptocurrencies As a New Global Financial Asset

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Cryptocurrencies As a New Global Financial Asset Cryptocurrencies As a New Global Financial Asset Gina Pieters Trinity University, Economics Dept, 1 Trinity Place, San Antonio, Texas, 78212, USA. University College London - Centre for Blockchain Technology, Malet Place, London WC1E 6BT UK Abstract The distribution of the crypto-market across economies has received little attention despite the markets substantial size. I show that the distribution of fiat currencies across Bitcoin does not correspond to the distribution across the crypto-market in general, with some economies investing considerably more (or considerably less) in non-Bitcoin cryptos. Because cryptos represent their own medium of exchange I derive three different measures of fiat market shares: Direct, Purchase, and Implicit. All three measures find that while cryptos may be globally traded, the crypto-market is highly concentrated in just three economies| the US dollar, the South Korean Won, and the Japanese Yen account for over 90% of all crypto transactions. Fiat shares in the crypto market cannot be explained by size of the corresponding stock market, economic size, income, financial openness, or digital access. Some currencies with large exposures to the crypto-market have only a small market-share which may represent either increased diversification away from home-bias, a new route for financial contagion, or both. 1. Introduction The crypto-market|consisting of cryptocurrencies, cryptotokens, and cryptoassets|is a completely digital, online market that has the potential to financially connect economies around the world. Cryptos|the most famous of which is Bitcoin|have no physically trade- able form. Unlike traditional currencies or assets, are usually unlinked to a physical location or market, and therefore they are not susceptible to the economic health of any single econ- omy. There is also a low barrier to entry into the crypto-market: all that is required is internet access. Information about a particular crypto is available to all market participants|the lack of physical connection mean that there is no local information benefit. Taken together, this implies a country importance to to the crypto-economy should be dictated by economic Email address: [email protected] ( Gina Pieters) size and predilection towards crypto-investment. Yet very little has been done to character- ize the global distribution of crypto-purchases across fiat, state-issued currencies.1 While we are aware that cryptos are traded internationally, we have no measure of the link between this new digital market and any given economy even as the first Bitcoin-based products have begun trading in formal financial markets, and daily crypto trading value exceed one quarter of the USA stock market trades.2 Bitcoin and the crypto-market do not follow a price or return series associated with any specific economy. Baur et al.(2017) show that Bitcoin prices do not have returns resembling that of gold, equity indexes, or fiat currencies|following a a different volatility process than other assets or exchange rates. Bouri et al.(2017) has similar findings using a portfolio- based approach, with results showing that Bitcoin is a poor hedge against major world stock indices, bonds, oil, gold, a commodity index, and the US dollar index, but instead acts as a good diversifier given its lack of correlation. Phillip et al.(2018) expands the scope to examine 224 cryptos, and similarly finds that they unique statistical properties. One study that has examined the distribution of Bitcoin purchases, Hileman and Rauchs (2017b), found that Bitcoin trades are dominated by four currencies: the US dollar, the Chinese Yuan, the Euro and the Japanese Yen. However, Bitcoin now accounts for only 42% of the crypto market capitalization. Given the lack of country-specific correlations across the crypto market, it would be intuitive that if the US dollar is 40% of all Bitcoin purchases, it should also be approximately 40% of all Ethereum, Litecoin, and Ripple purchases as well. This paper is the first to document that the distribution of currencies across the crypto market as whole is different from that of the Bitcoin market. This implies that some links between economies and the crypto-market are stronger (or weaker) than Bitcoin purchases would suggest. 1I will use the term “fiat currencies" to refer to recognized national monies, such as the US dollar, or Japanese Yen. 2Bitcoin futures began trading on the Chicago Board Exchange Options (CBOE) on December 10, 2017, and Bitcoin derivatives began trading on the Chicago Mercentile Exchange (CME) on December 18, 2017. 2 This paper is also the first to take the crypto-measurement problem seriously: a crypto is a digital asset flow that can be denominated in a medium of exchange not associated with any fiat, state currency. It may also not be feasible to directly purchase some cryptos, instead a intermediate crypto may be purchased and used instead. I explore three different measures of fiat shares in the crypto market, including an implicit currency exposure measure that replaces all crypto-crypto purchases with their underlying fiat components. These measures change the relative market share of cryptos, causing half of them to exchange ranks. Regardless of measure used, over 90% of all fiat transactions occur based in just three currencies: the South Korean Won, the US dollar, and the Japanese Yen. This concentration of this digital financial market cannot be explained by stock market behavior, economic size, income, financial openness, or internet access: our standard comparisons of cross-country financial investment behavior do not seem to apply to this new market. In Section2 I describe my data set: the daily transaction data from 151 exchanges for the top 50 cryptos. In Section3 I construct the share of fiat transactions in the crypto- market using different measures. In Section4 I compare the Bitcoin and crypto market transaction shares to global stock market transactions and show that they differ significantly. Additionally, I show that fiat investment in the crypto-markets do not correspond to economy size, income, or financial openness, and that the exposure to the crypto-market does not correspond to market share. Section5 concludes. 2. Data Collection and Summary I collected the 24 hour transaction volume (measured in USD) for the fifty largest cryptos as measured by market capitalization from Coinmarketcap3 for Saturday, December 16, 2017. The data, shown in its original form in Figure1, contains information on the total 24-hour transaction volume for each pairing on each exchange. All volumes are measured in USD dollars to ensure comparability. This data identifies 26 fiat currencies and 560 cryptos that 3http://www.coinmarketcap.com 3 Figure 1: Sample of Data Source Note: Screen capture from www.coinmarketcap.com showing the raw format of the data. For each crypto (Bitcoin in the example), Coinmarketcap reports 24-hour trade volume of pairs in each market. In the screenshot, the largest share of Bitcoin trades, 6.30%, occurred on exchange Bitfinex in which Bitcoin were traded for $796,043,000 US dollars over the course of 24-hours. were exchanged across 151 exchanges in exchange for the fifty cryptos. By construction, this data set does not report any transactions that do not occur on ex- changes (for example, direct wallet-to-wallet transactions), however it does capture off-chain transactions that occur on exchanges. Off-chain transactions are transactions that are not reported to the decentralized ledger (the blockchain), and are instead merely recorded on the exchange's books. Off-chaining is employed by exchanges for transactions that occur be- tween parties registered on the exchange to reduce transactions costs and increase transaction speed. The website blockchain.info4 reports the transaction information from the Bitcoin 4https://blockchain.info/ It reports only the quantity of bitcoins exchanged between two wallets, it does not report what was received in return. 4 blockchain, and reports that on December 16, 2017 Bitcoin's total on-chain transaction vol- ume was 262,598 Bitcoins. In contrast, CoinMarketCap recorded a transaction volume on exchanges of approximately 808,042 Bitcoins. This shows that the off-chain transactions dwarf the number of non-exchange transactions, and that focusing exclusively on data from exchanges does not result in a significant information loss for Bitcoin. I will assume that this pattern is sufficiently true for the other 49 cryptos as well, so that exchange transaction data reflects the majority of crypto-transactions. Table1 summarizes the age, market capitalization, and the the 24-hour transaction volume of the selected cryptos, and provides the full name associated with their code ab- breviation. While the initial selection criteria required that the cryptos be one of the fifty largest by market capitalization (out of the 1,373 cryptos recorded as existing), the result- ing selection varies greatly in age and transaction volume. Some are less than a month old (GNT), while others are over five years old (BCN). Some have amongst the highest daily transaction volume in the crypto market (BTC), while others are not in the top 10% (VERI). Some cryptos are sold on over 100 exchanges (LTC), while others trade on only 2 (BNB). Some are only sold on exchanges where no fiat currencies are accepted (KMD), while others (BTC) are sold on over 50 exchanges that accept fiat currency. I will use implicit currency exposure to control for this difference in direct fiat access. The total daily transaction value|including both fiat and crypto trades|is $29 billion dollars. This is approximately one quarter of the $115 billion dollar traded daily on USA stock markets.5 Table2 summarizes top 20 of the 587 currencies and cryptos used as a medium of exchange to purchase the fifty cryptos. Table2 provides implicit evidence that part of Bitcoin's value comes from its high degree of convertibility: it is the only medium of exchange, out of the 587 in the data set, that can be exchanged for all the top cryptos in the market.
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